The Amateur Financier

I’ve read quite a few personal finance books, both before starting this blog and then even more frequently as I started reviewing them here.  Few of the books I’ve encountered have been written from younger readers; most authors don’t write for younger adults, yet alone minors.  That’s one reason why Beyond the Lemonade Stand from Bill Rancic stands out among personal finance books; not too many other personal finance-business books focus on helping children build a business.

Three Sentence Summary: Rancic starts by related some of the business ideas he tried as a child, included the lessons he learned from them.  The middle of the book is devoted to a list of twenty possible businesses that kids could open, along with advice on each one.  The book finishes with some suggestions about what kids can do with the money they earn, from spending to saving to investing.

Summary: The book opens with an introduction from Rancic, noting his interest in business and encouraging the children reading to build their own businesses.  The first part of the book is a walk through of Rancic’s childhood business ventures, pointing out some of his successes and failures along the way.  From babysitting to delivering newspapers to, yes, running a lemonade stand, Rancic’s adventures (and the lessons he learned from each) provide a quick crash course in youthful business procedures.  Laced into Rancic’s stories  are comments from other business persons as well as pictures of Rancic as a child, doing many of the jobs he describes.  Also included throughout the chapter are comments and suggestions from various children describing their ideas for businesses, their experiences starting some of those businesses, and the lessons you can draw from their experiences.

The second part of the book is a list of twenty kid-friendly businesses.  Each listing provides an explanation of the business idea, which cover classics like lawn mowing, snow shoveling, and dog walking, as well as more up-to-date potential businesses like technology teacher and website developer.  The chapter covers some of the pros and cons of each job, the traits that would make you enjoy that particular job, and some advice on spreading the word about your business venture.  The third part of the book is about creating a business plan for your business, identifying things like start-up costs and the customers you’re going to serve.

The fourth part of the book is a short guide to managing the money you earn from your business.  From saving and investing to growing your business and helping others, a number of suggestions are included in this section.  The book finishes with a section for recording appointments and a contact sheet and a glossary of some of the basic personal finance and business terms used throughout the book.

Pros: Well-written at a level appropriate for kids, with a lot of good suggestions.  The list of possible jobs covers a wide range of opportunities, and does a good job of painting a realistic picture of what awaits any kid who wants to try those businesses.  The pitfalls and perils listed for each job (and working in general) are good, providing information that is important for any business venture.  (Also, Rancic donates all of his royalties from the book to children’s charities; while this point doesn’t change the actual content of the book, it does make me look upon him and the book more favorably.)

Cons: Rancic’s personal stories seem to go on a bit too long, while the section on what to do with money generated by the business is rather short.  Many of the suggestions given, while well detailed, aren’t particularly creative (shoveling snow, cleaning pools and mowing lawns are the sorts of businesses that kids were running even back in my day; it’s hard to imagine too many young people who don’t know about them).  Given the subject of the book, while it’s very helpful for a child, if you are an adult with a reasonable amount of personal finance knowledge, there’s not much in here that will help you.

Overall: If you’re looking for a decent book for children giving them advice on starting their own business venture, then Beyond the Lemonade Stand might be for you.  There’s a limit on how much benefit you can derive if you are an adult without any children in your life to encourage in their business ventures, but for the target audience of children and preteens, it makes an excellent introduction to the world of business.

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As always, the Financial Samurai has written about an interesting phenomena, namely the link between happiness and income.  He rightly points out that a hard and fast limit on when money stops adding more happiness (particularly a relatively low value like $75,000 a year) is foolish.  Setting a limit for what income level leads to maximum happiness, particularly when there is so much variation in people and their attitudes toward money (even in the same country), an income amount that makes you ecstatic might barely register to someone with much higher expectations.

That said, I think Sam puts too much emphasis on government influence over these statistics; I don’t think that there’s a government (or researcher) conspiracy to convince people that salaries above $75,000 won’t lead to anymore happiness.  In fact, the study itself points to two types of happiness: your daily emotional state (happy, sad, angry, depressed at the horrible state of the world, etc.) and your satisfaction with how your life is going.  The former peaks out at $75,000 (so, millionaires have as many sad days as $75,000 a year earners), although there seems to be no limit on how much your income can improve your satisfaction with life (Bill Gates is presumably more satisfied with how his life worked out than the average worker).

He looks pretty happy, doesn't he?

Even with that caveat, I also think that choosing any arbitrary line dividing an income level below which more money makes your happier and above which it does not is silly.  There are billions of people on the Earth, in any number of economic conditions, and positing a set income level as THE ideal income for maximum happiness should be impossible.  Whether it’s $75,000, $60,000 (as noted by earlier studies), or the $200,000 posited by Financial Samurai himself, there’s no way that any one income will be the tipping point separating happy from unhappy.  In the developed world, $75,000 might be enough to afford a decent, if not spectacular, lifestyle; but in poorer areas of the world, $75,000 could easily make you one of the richest people around.

How to Make Yourself Happier

So, there is a link between income and happiness, but it’s more subtle than it might first appear.  How, then, can we improve our happiness?  Here’s a few thoughts on the subject:

1) Earn More Money: As mentioned above, there is a link between higher income and satisfaction with how your life is going; while earning millions will not keep you from having days when you are sad, it will make your overall life happier.  Finding methods of earning more income, particularly in ways that don’t involve working longer hours, doing hard work, or otherwise doing things that will decrease your happiness more than the extra money will increase it.  Finding methods of earning passive or investment income will help you increase your income while not having to put in longer hours at your job.  Speaking of your job…

2) Do Work You Enjoy: For most of us, work is a necessary evil; we’re not yet at the point where our investments or passive income can provide us with the income that we need to survive.  But if you have to work, you can at least do work you enjoy.  Being able to go to work every day and do something you enjoy (or at least, don’t hate with every fiber of your being) can provide you with a great level of happiness, even if the work you do doesn’t pay a great deal of money.  If it happens to earn a sizable amount of money, even better, as you can kill two birds with one stone.

3) Cultivate a Rich Personal Life: Man cannot become happy on work alone.  (Well, most men (and women, for that matter) cannot; there are the occasional people who seem to derive all their happiness from their employment.)  If you have family you can depend on, friends you enjoy spending time with, and a significant other who brings light into your life, you can be happy.  Money helps, and more money will help more (far be it from me, a personal finance blogger, to downplay the role money has in our life), but even if you don’t have much money, a good personal life can make you feel rich.

So there you have it, a few ways to make your life happier.  Here’s hoping that you’re already incredibly happy with your life, but if not, I wish you all the luck in the world making it so.

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If you’re like many people today, you’ve probably played online games at one point or another.  If you’ve done so in the past 12 years, you might have even played a little game called Starcraft, a strategy game where you control one of three competing alien races.  If you happen to live (or were willing to move) to South Korea, though, you could have made a career of playing and competing against other players.

I’ll give you a moment to read all about the players, their groupies, and their (six figure) salaries (including the fact that the tournaments are attended by more people than the Superbowl).  I’ll give you a few more moments to shake your head in disbelief and contemplate the unfairness of life.  Ready to go on?

As crazy as it is for the players of a computer game to make so much money, it’s really not that unprecedented for the top performers in certain fields to make incredible profits.  Is it really that different (or more bizarre) for players in physical sports (football, baseball, soccer, etc.) to earn multi-million dollar salaries?  Or for top movie actors to have earn millions per movie, while the average actor has to get a side job as a waiter/waitress just to pay the bills?  In all these cases, the top performers benefit from the Superstar Effect.

The Superstar Effect

The Superstar Effect is the economic term for when the top performers in some fields are able to get phenomenally large salaries.  In order for you to be a superstar, your field needs to meet three criteria:

• The market must be fairly large; if only a few hundred people are interested in your field, you’re  not going to become a superstar, regardless of how good you are.  (This is why there are superstar singers, but no superstar nose flutists.)
• Everyone in the market wants the good provided by the top performer.  This is usually not an issue; if all other things are equal, the average person is going to want the goods or services that are the best.
• The good is provided with technology that enables everyone to enjoy the services of the top producer.  (This is why there aren’t any superstar plumbers, but there are superstar singers; wide distribution of songs allows everyone to enjoy the performance of, say, Katy Perry, but plumbers can only fix so many sinks during the week.)

What? I'm a Katy Perry fan.

These characteristics mean that the easiest fields in which to become a superstar are those that involve performing in one method or another.  It’s easy to record something like a a movie (or a professionally played Starcraft game) and distribute it as widely as needed.  The costs of adding one more copy to the number already being produced (the marginal cost of increasing the distribution) is relatively small, meaning that it’s easy to expand the number of people who watch (or play, or otherwise enjoy the product).  The same logic holds for some physical goods, as well; more people want to read the latest book by Stephanie Meyers than alternative books, and so she becomes ever wealthier.

Of course, it’s not possible for every profession to develop superstars; for fields where you need to be there in person (everything from plumbers to doctors to lawyers), it’s impossible to reach true superstar status (at least with our economics-provided definition).  While the market might be large for their skills, and everyone wants service from the top performer, it’s usually not possible for doctors or lawyers to provide service to everyone who wants their help.

The Downsides of the Superstar Effect

In the modern age, though, there are some downsides to meeting the qualifications for being a superstar.  Everyone wanting to enjoy your products, cheap and easy methods of distribution and lots of fans are a recipe for both superstardom and widespread pirating.  It shouldn’t be a surprise that the fields where most superstars develop (music, movies, and other recorded performing arts) are also the fields most afflicted by piracy.

Unfortunately, there’s a tricky balance that needs to be struck.  Too much effort put into making it impossible for pirates to to copy your work can also make it harder for legitimate users to access your products; too little effort can result in your product being rampantly pirated, decreasing your profit.  Finding a balance between these two extremes can be tricky, and you can see how various groups have run into trouble going to one or the other extreme (The RIAA, the Record Industry Association of America, is (in)famous for their prosecution of people who download music from illicit websites; they’re also the butt of numerous jokes and snide comments as a result.)  All of that said, though, it’s the sort of problem I’m sure most of us would like to have; figuring out how to make some money off the incredible throng of people eager to enjoy our products.

That’s the Superstar Effect in a nutshell; the explanation for how superstars can develop in every field from movies to music to yes, playing a decade-old video game really, really well.  Next time someone starts to complain about the outrageous salaries commanded by professional athletes, feel free to point out the salaries commanded by professional Starcraft players and the universal tendency to (over)pay people who play games.

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It’s Monday the Thirteenth!  Bad luck is everywhere!  Everybody panic!  Alright, Monday the Thirteenth doesn’t strike quite as much terror into the average person as, say, Friday the Thirteenth (maybe a film series featuring a supernatural killer and numerous scantily-clad coeds being slaughtered would change that), but while we’re on the subject of bad luck…

The simple fact is that bad things happen to us; as they say, ‘Into every life some rain must fall’, or any number of other cliches.  There’s no way to avoid it, so instead we have to look at how we can make it easier to get back on our feet when bad times strike.  In honor of the Thirteenth, here’s thirteen things you need to make sure that you’re ready when bad luck hits:

1) An Emergency Fund: A prerequisite for any emergency preparation, having money set aside specifically for the bad times that occasionally befall us all is vital.  I would go a step further, recommending that you create a step-like system of multiple emergency funds, to ensure that you can make it through any length emergency.  But even a simple savings account with some money to provide for an unexpected expense is a good start.

2) Cash On Hand: I mention this in the emergency fund topic I linked to above, but it bears repeating: occasionally, you will need access to actual, physical cash, usually because that’s the only payment medium being accepted.  (Think about the aftermath of most major disasters, from earthquakes to hurricanes.)  While you don’t need to carry a month’s salary on you at all times, a few hundred dollar bills (or the equivalent in your own local currency) in a secure but accessible location could make the difference if you happen to find yourself getting the short end of nature’s stick.

Ah, cash; always good to have a nice supply of you on hand.

3) A Road Repair Kit: If you have your own car, you probably already keep one of these in the back seat or trunk.  While you shouldn’t expect to bring your car back from a major crash (or even anything more severe than a flat tire), the ability to make minor repairs can, over the course of a lifetime spent driving, save you significant amounts of money (to say nothing of hours spent waiting for repair people to arrive).

4) Home Repair Supplies: On the same token, having the supplies (and the skills) to make minor repairs on your home can be a major time and money saver.  Don’t try to do more than your skills allow (particularly when it comes to potentially dangerous tasks, like electrical wiring), but things like patching a hole in the wall or fixing a minor leak shouldn’t strain your abilities too much.

5) Health Insurance: Ah, yes, there’s really no way you can talk about protecting yourself from bad luck without mentioning insurance.  If you live in the US, you probably get your health insurance through your employer; if not, you’ll need to seek out your own health insurance (typically at much higher prices).  It’s still better to have insurance than not, though, so shopping around for the best combination of price and service is usually your best option.

6) Life Insurance: Life insurance is less of an absolute; while it’s definite that you will die at some point (sorry to be a bummer), you only really need life insurance if you (a) have one or more people who depend on you for financial support and (b) don’t have adequate savings to provide for them when you’re gone.  If you’re young, unmarried, and have no kids, or if you’re already retired and have a sizable amount of money put aside for your family, you can do without life insurance, while the middle-aged guy with a wife and young kids definitely should get life insurance.  There are several types, but for most people the best option is a term life policy to cover your prime money earning (and family supporting) years.

7) Homeowner’s/Rental Insurance: You need a place to live, and while you’re living there, you’ll also need to insure your property.  Not only to help you regain all your stuff in case of a fire or other emergency (although, that is a plus), but also to protect you monetarily if there is an accident in your residence.  Which type you’ll need depends on whether you rent (rental insurance) or own your property (homeowner’s insurance), although in both cases, you should look for replacement cost policies (which will provide you with enough money to repurchase all your possessions) rather than an actual cash value policy (which will pay the (depreciated) cash value of your possessions).

8 ) Other Forms of Insurance (As Needed): I could probably have filled this entire list with different types of insurance, but let’s try to wrap things up.  You should also consider disability insurance (in case you are injured and unable to work), long-term care insurance (to provide for you in your old age), and if you have a car or other vehicle, automotive or other appropriate vehicular insurance (not only to protect your savings in the case of an accident, but also because it’s the law in many states).  Your exact insurance needs will vary according to your current financial situation, so do some research and plan accordingly.

9) First Aid Kit: Insurance is good and all, but sometimes you need a more immediate, non-financial fix.  Keeping a first aid kit or two (as well as the skills to use it properly) in your home, car, and possibly even your place of work will help when you or one of your companions inevitably gets injured.  Of course, you also need to know how to use your first aid kit, which brings us to…

10) CPR Training: Chances are that you have more than a few opportunities to learn CPR and other first aid techniques; from local community college offerings to training seminars provided by your business, you should be able to find somewhere to learn without a problem.  The trick is finding the time to attend; hopefully, the idea of being able to save your family members (and possibly revive some of those old Boy/Girl Scout memories) can help to inspire you.

11) A Will: Annnddd we’re back to the fact that you are mortal, and will die at one point.  (Unless you happen to be a Highlander, in which case I suggest you spend all your free time working on your sword skills.)  A will can help, by ensuring that your possessions and money will be distributed to your family and anyone else you want to inherit from you.  Unfortunately, if you only have a will (which is still more than many people have to stipulate their wishes) your heirs are likely to end up in probate court, while a judge decides what happens to your earthly possessions.  You can avoid this situation by having…

12) A Living Revocable Trust: The nutshell version of a living revocable trust is that it serves as a way of passing on financial or other assets to your heirs without having to visit probate court along the way.  You create a legal structure (a ‘trust’) that holds your assets, and transfer control of that trust to your chosen heirs.  You’ll bypass the probate system entirely, and make sure that there aren’t any problems when they inherit your property.  (While we’re on the subject of your last days on Earth, you might also consider setting up a durable power of attorney, to specify what health measures you want taken to preserve your life and whom you want making decisions about your health if you are unable to do so.  As with all of the suggestions on this list, it might seem a bit morbid, but better safe than sorry when the time comes…)

13) A Life Free From Regrets: Last, but far from least, you should do everything in your power to make sure that when you pass on, you don’t leave life with regrets.  From the things we wish we could have done to the unresolved fights with family and friends, there’s lots of reasons we might leave unfinished business here in the mortal coil.  It won’t protect you from bad luck, and doing your best to resolve these issues and regrets before you die will not make dying any easier, but having no regrets will hopefully give you a better sense of closure while you die.

There you have it, a lucky thirteen ways to protect yourself from bad luck.  Hopefully you won’t need to use the protections suggested here for a very, very long time, but as I’ve been stressing throughout this article, it’s better to be safe than sorry.  Good luck, everyone!

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